China is currently turning itself inside out. It's an arduous process of switching from an export driven economy of low wages, to a middle class society driven by local consumer spending power. That shift is still in its early stages. But as it unfolds, China has already become a middle income nation, according to World Bank standards. This is most evident along the highly populated eastern seaboard cities, from Guangzhou to Beijing, where incomes are well over the $12,000 a year needed to be classified by the World Bank as middle income. In those cities, incomes are well over $25,000.

The long-awaited structural shift in China is now under way and may have been underappreciated, says Yiping Huang, an economist for Barclays Capital in Hong Kong. "The Chinese economy is breaking away from its past imbalanced, uncoordinated, inefficient and unsustainable growth model," Yiping said in his report China: Beyond the Miracle, published last week in its final nine-part installment.

One key trigger of this change is rapid wage growth stemming from the emerging labor shortage. This not only redistributes income from corporations back to households but also improves equality among households in a society that is seeing inequality run amok.

Although rebalancing has so far been driven mainly by changes in Western markets, economic reforms will be critical for furthering change in China, says Yiping. These reforms include removing remaining cost distortions, liberalizing the financial sector and improving China's very weak safety net.

China is aging much like the United States, but the vast majority of Chinese do not have any sort of livable government pension to count on, let alone health care.

Meanwhile, privatization of government owned entities is probably not feasible in the near term, but the government likely will move steadily toward the creation of a level-playing field by removing input cost subsidies and reducing the monopoly power, allowing for newcomers in the market that can address these gaps.

While it is unlikely that China will adopt Western-style democracy any time soon, Yiping says to expect China's leaders to implement some political reforms in the years ahead. Such steps may be necessary to ease social economic tensions and facilitate continuous economic growth and could include the gradual extension of direct election to higher levels of government, having more candidates than posts in high-level internal elections, increased tolerance of social media, stepped-up efforts against corruption, and improvements in the transparency of budgetary and other decision processes.

"We don't think Chinese political institutions have exhausted their potential to foster growth," says Yiping Huang. "We think political reforms are likely in the coming years."

Then there is the increased investment in science and technology in China, which has occurred earlier than international experience would suggest. This is probably because of China’s high literacy rate, large market size and proximity to dynamic economies. In fact, China is already among the world’s leaders in research and development spending despite its middle-income status, Yiping notes, despite the fact that a lot of its patents leave little to meet the eye. China is notorious for copying old technology, making minor changes, and calling it a new patent.

However, private enterprises are playing an increasingly important role in China’s R&D activities now than ever before. As China invests more in new products and becomes more entrepreneurial, hitting the high road to high income status becomes more plausible.

Currently, China’s GDP per capita is $6,000. The World Bank’s criterion for high income is per capita above $12,000. China needs to double its real per capita income to get there.

"We think this could happen before 2020 if we assume growth potential at 7% to 8% and modest currency appreciation of, say, 3% a year," says Yiping.

By then, the Chinese economy would be at least as large as that of the United States. And per capita income will be more like $22,000, putting it on par with Korea's current income level.